IRS approves need-based scholarship procedures

Plain-English summary

A private foundation asked the IRS to approve a scholarship program for students at a particular school who require financial aid. The school selects recipients based on financial need, a minimum 3.0 grade point average, and co-curricular activities, and the foundation pays the awards directly to the school. The IRS approved the procedures under IRC § 4945(g)(1), so grants made under the approved procedures will not be taxable expenditures. The awards also may be excluded from recipients' income under IRC § 117 when used for qualified tuition and related expenses. The approval applies only while the program's standards and procedures remain substantially as described.

Ruling snapshot

• Question: Do the foundation's procedures for awarding need-based scholarships satisfy IRC § 4945(g)(1)?
• Outcome: Approved.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 4945(g)(1), 4946.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201445025
Release Date: 11/7/2014 Employer Identification Number: Date: 8/13/2014

Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945-04.04

X=
Y=

Dear :

You asked for advance approval of your scholarship grant procedures under Internal Revenue Code section 4945(g). This approval is required because you are a private foundation that is exempt from federal income tax. You requested approval of your scholarship program to fund the education of certain qualifying students.

Our determination

We approved your procedures for awarding scholarships. Based on the information you submitted, and assuming you will conduct your program as proposed, we determined that your procedures for awarding scholarships meet the requirements of Code section 4945(g)(1). As a result, expenditures you make under these procedures won’t be taxable.

Also, awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified tuition and related expenses (subject to the limitations provide in Code section 117(b)).

Description of your request

Your letter indicates you will operate a scholarship program called X.

Your purpose is to engage in charitable activities by enhancing access to higher education. Specifically, you provide scholarship aid to Y students that are deemed to be worthy of such aid.

The number of scholarships that will be awarded each year and the amount of each scholarship will vary depending on the amount of funds available to be distributed.

Letter 4792 (10-2012)
Catalog Number 58263T

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The Financial Aid office determines that a student qualifies for financial aid using the Free Application for Federal Student Aid (www.FAFSA.ed.gov) and the CSS Profile (http://student.collegeboard .org/css-financial-aid-profile). The Financial Aid office notifies students that demonstrate the most need of their eligibility for this award.

You will maintain the case histories showing recipients of your scholarships, including names, addresses, purposes of awards, amount of each grant, manner of selection, and relationship (if any) to officers, trustees, or donors of funds to you.

The Trust provides scholarships to students who attend Y and require financial aid. Factors reviewed in the decision making are the students’ financial budget, grade point average (3.0), and co-curricular activities.

Each year, you advise Y of the amount available for scholarships. Based on the amount available for distribution, Y designates students to receive said scholarship based on financial circumstances of the recipient. All scholarships are awarded on an objective and non-discriminatory basis. No scholarship may be awarded to any disqualified person as defined in Code Section 4946.

Y sets amounts based on the amount of funds available and financial need of recipient.

Students may reapply if they continue to attend Y, demonstrate financial need and maintain a minimum grade point average of 3.0.

You pay the scholarship proceeds directly to the Y for the benefit of the recipient. You send a letter to Y on behalf of each recipient specifying that Y’s acceptance of the funds constitutes that it agrees to notify you if the scholarship recipient fails to meet any term or condition of the scholarship and return any unused portions of the award to the Trust.

You represent that you will:

1. Arrange to receive and review grantee reports annually and upon completion of the
   purpose for which the grant was awarded,

2. Investigate diversions of funds from their intended purposes, and

3. Take all reasonable and appropriate steps to recover diverted funds, ensure other
   grant funds held by a grantee are used for their intended purposes, and withhold further payments to grantees until you obtain grantees’ assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversions from occurring.

You will investigate diversions of funds from their intended purposes and take all reasonable and appropriate steps to recover diverted funds.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations (Code section 4945). A taxable expenditure is any amount a private foundation pays as a

Letter 4792 (10-2012)
Catalog Number 58263T

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grant to an individual for travel, study, or other similar purposes. However, a grant that meets all of the following requirements of Code section 4945(g) is not a taxable expenditure.

• The foundation awards the grant on an objective and nondiscriminatory basis.

• The IRS approves in advance the procedure for awarding the grant.

• The grant is a scholarship or fellowship subject to the provisions of Code section 117(a).

• The grant is to be used for study at an educational organization described in Code section 170(b)(1)(A)(ii).

Other conditions that apply to this determination

• This determination only covers the grant program described above. This approval will apply to succeeding grant programs only if their standards and procedures don’t differ significantly from those described in your original request.

• This determination applies only to you. It may not be cited as a precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have changed substantially. You must report any significant changes to your program to the Cincinnati Office of Exempt Organizations at:

Internal Revenue Service

Exempt Organizations Determinations
P.O. Box 2508

Cincinnati, OH 45201

• You cannot award grants to your creators, officers, directors, trustees, foundation managers, or members of selection committees or their relatives.

• All funds distributed to individuals must be made on a charitable basis and further the purposes of your organization. You cannot award grants for a purpose that is inconsistent with Code section 170(c)(2)(B).

• You should keep adequate records and case histories so that you can substantiate your grant distributions with the IRS if necessary.

Please keep a copy of this letter in your records.

Letter 4792 (10-2012)
Catalog Number 58263T

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If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Director, Exempt Organizations

Letter 4792 (10-2012)
Catalog Number 58263T